MEMORANDUM oil by benbenzhou

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									MEMORANDUM



July 7, 2006


FROM:                  Joseph C. Bell
                       Hogan & Hartson LLP

                       Professor Cheryl Saunders
                       University of Melbourne Australia

RE:                    Iraqi Oil Policy -- Constitutional Issues Regarding Federal and
                       Regional Authority

              This memorandum addresses certain Constitutional interpretation
issues relating to Iraqi oil policy and the division of authority between the federal
government and the regions and governorates. The Constitution is problematic in
many respects including the division of powers between the federal government and
the regions and governorates. Nevertheless, we believe that there are strong
Constitutional arguments in support of the role of the federal government which we
have canvassed below.

             The memorandum is based solely on a linguistic analysis of the
English version of the Constitution. There may be nuances in the official Arabic
version that would affect this analysis. Moreover, there may have been common
understandings among the parties that negotiated the text as to its meaning
although in the context of a referendum which voted solely on the text itself it is not
clear that such common understandings, if any, should have any persuasive force.

Ownership of Oil Resources

              Article 111 is unequivocal that all oil and gas are owned by “all the
people of Iraq in all regions and governorates.” (Emphasis added.) The language on
its face does not admit to the ownership of any particular resource by any particular
group or geographical or political region. In effect it gives all citizens of Iraq,
wherever resident, an undivided interest in all of the oil and gas resources of the
country. Notably it does not vest oil and gas resources in the “state” nor does it
allocate the resources to particular regions or governorates. The regions and
governorates are addressed solely in the collective form. Moreover it refers to all of
the oil and gas resources and does not use the limiting language of “current fields”
included in Article 112 First.




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              Given that oil and gas is the property of the “people” as a whole, any
power to alienate the resource by sale or other disposition lies with the “people.” In
this regard it is worth noting that the only political entity directly representing all
of the people of Iraq is the Council of Representatives. Article 49 First.

Management of Oil Resources

             Article 112 First provides that the federal government, with the
“producing” governorates and regional governments, shall manage oil and gas
“extracted from present fields” subject to a revenue distribution formula.
“Management” in Article 112 is not defined nor is it subject to any words of
limitation. Thus management should be read in the ordinary sense of conducting
or supervising all of the business aspects relating to oil and gas extracted from
present fields, e.g., production, transport, refining, disposition.

               Article 112 Second provides that the federal government, again with
the producing regional and governorate governments, shall establish the strategic
policies for the development of oil and gas in accordance with certain standards.
Article 112 Second does not contain the limiting words “extracted from present
fields.”

              Thus Article 112 provides a general structure for the oil and gas sector
in which strategic policies are set on a unified basis for all of the oil and gas
resources of the country and those policies are implemented, in the case of present
fields, by the federal government with the producing governorates and regional
governments.

              The word “extracted” does not connote a limitation on this
management authority but rather should be read as defining what oil and gas
resources are subject to the management authority of Article 112 First, i.e., oil and
gas “extracted from present fields.” Article 112 envisions two functions: the
establishment of oil and gas policies and management of the oil and gas resource.
It does not create a tri-partite definition in which “extraction” would not be subject
to either the strategic policies or the management function.

Authority of Region under Article 112

             Article 112 First provides that the “federal government, with the
producing governorates and regions” shall undertake the management of the
designated resources. Article 112 Second provides that the “federal government,
with the producing regional and governorate governments,” shall formulate the
necessary strategic policies.



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             Article 112 First provides at the end of the section for the matters
addressed in the section to be regulated by a law.1 The same provision for
regulation by a law is not included in Article 112 Second dealing with the
formulation of strategic policies. Perhaps, the drafters did not view “policies” as
requiring legislation. In this case, serious questions of transparency and
accountability arise in relation to the making and communication of “policy”.

              The precise nature of the interaction of the federal government and the
regions and governorates under Article 112 is not clear and may have been left
deliberately ambiguous. Article 112 by its language and its separation from Article
110 (the exclusive authorities of the federal government) and Article 114 (the
shared competencies) is evidently something more than a shared competency but
something less than an exclusive competency. Some sort of collaborative or
consultative process is required. Two items, however, point to the leadership of the
federal government in the process. In both the first and second sections, the
federal government is the subject of the sentences and is commanded to act, albeit
with the producing regions and governorates. Secondly, in Article 112 First the
activity subject too the section is to be regulated by “a law”. The unitary reference
to “a law” as elsewhere in the Constitution refers to federal legislation. Thus
whatever the form of collaboration between the governmental units, the final action
is to be determined by the federal Council of Representatives.

             The leadership of the federal government in Article 112 is further
reinforced by Article 110 which sets out those areas where the federal government
has “exclusive” authority. Among the exclusive authorities of the federal
government are “formulating foreign sovereign economic and trade policy”; and
“regulating commercial policy across regional and governorate boundaries in Iraq.”
Thus, the shared authority of Section 112 is cabined by the power of the federal
government to prescribe and set policies whenever trade or investment crosses
national, regional or governorate boundaries or involves trade or investment
moving in and out of Iraq. Regional action in violation of such policies would be
unconstitutional as it infringes upon areas committed to the exclusive authority of
the federal government.

              Even if one reads Article 112 Second as it relates to the formulation of
strategic policies in the oil and gas sector as being an exception to the exclusive

1      In the English translation the antecedent to “this” is not specific, but since
the section is divided into a compound sentence, with the second sentence providing
for regulation by a law, the “this” would on the better reading cover both
management and allocation.



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power of the federal government, virtually all ancillary implementing action would
be subject to those policies that the federal government has the exclusive authority
to establish. Only activity taking place exclusively within a governorate would be
exempt, a very limited area indeed.2

Limitation on Present Fields

        Article 112 First applies to all gas and oil resources “extracted from present
fields.” The phrase needs to be broken up into its component parts.

       Nothing in the Constitution suggests that “field” should be given anything
but its ordinary understanding in the petroleum industry and in Iraq. The Society
of Petroleum Engineers defines field as follows:

         Field – An area consisting of a single reservoir or multiple reservoirs all
         grouped on, or related to, the same individual geological structural feature or
         stratigraphic condition. The field name refers to the surface area, although it
         may refer to both the surface and the underground productive formations.

In Iraq various areas and structures have historically been identified as fields, e.g.,
the Rumaila field, the Kirkuk field.

              Greater controversy surrounds the qualifier “present.” We understand
that “present” is supposed to be some sort of temporal limitation. Assuming this
there still remains considerably ambiguity. Some have argued that “present”
means “presently in production” or “presently producible” but there is no such
qualifier in the text. The difference is not trivial.3 Nor does the Constitution

2      How far the federal government’s exclusive power reaches under these
provisions is open to further interpretation and development. But apart from
Article 112 most oil activity and investment would fall within the exclusive
authority of the federal government whether one takes an expansive view and finds
that any activity which “affects” inter regional trade or investment is subject to the
exclusive authority of the federal government or whether one imposes a more
restrictive reading in which the commerce committed to the exclusive authority of
the federal government must actually cross a governmental boundary. It is
important to note in this regard that the exclusive authority committed to the
federal government extends to commercial policy across “governorate boundaries”
thus trade within a region but across governorates would be subject to federal policy.

3      See, e.g., How Much Oil Does Iraq Have?, Iraq Memo #16, May 12, 2003, Gal
Luft, Co-Director, Institute for the Analysis of Global Security (IAGS).



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specify the point at which the “present” status of the fields is to be identified. On
the understanding of the phrase as a temporal limitation, the obvious date is that at
which the Constitution comes into effect

Regional Power to Nullify Decisions pursuant to Article 112

             The Constitution does give the regions and the governorates certain
powers to modify or nullify federal legislation, but neither can be reasonably read to
apply to Article 112. Article 115 provides:

        All powers not stipulated in the exclusive powers of the federal government
        belong to the authorities of the regions and governorates that are not
        organized in a region. With regard to other powers shared between the
        federal government and the regional government, priority shall be given to
        the law of the regions and governorates not organized in a region in case of
        dispute.

              Since the powers in Article 112 do not appear in the list of exclusive
powers of Article 110, the first sentence in Article 115 could be read to give the
regions and governorates authority in the areas covered by Article 112. This
construction, however, would make Article 112 a nullity and thus cannot stand.
The second sentence of Article 115 applies by its terms to the “shared” powers of the
the regional government and the federal government. The shared powers are
specifically dealt with in Article 114 and this reference should be limited
accordingly to the powers set out there.

                    Article 121 Second also gives the regions certain powers. That Article
provides:

        In case of a contradiction between regional and national legislation in respect
        to a matter outside the exclusive authorities of the federal government, the
        regional power shall have the right to amend the application of the national
        legislation within that region.




                “Furthermore, most [Iraqi] fields have not been explored down to the
        deepest layers of the ground, where plenty of oil can be found. Out of the 74
        fields that have been discovered and evaluated, only 15 are actually
        operating. In addition, there are 526 prospective drilling sites in Iraq today,
        but just 125 of them have actually been drilled. Of those, 90 have shown
        potential as oil fields, but only 30 have been even partially developed.”



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              Nevertheless, this article does not apply to the activities of Article 112
as this is not an area where the regional government has authority to adopt
legislation, pursuant to articles 114 or 115. On its face, moreover, this section only
applies to those areas where the federal and regional governments have shared
competency. These areas are set out in Article 114, and it is in these areas where
there is conjoint legislative authority that the regional government pursuant to
Article 121 has the limited authority to modify the federal legislation operative in
its region. To hold otherwise would again make Article 112 a nullity, not only
nullifying the federal authority but also the rights of the other producing
governorates and regions to participate in the policy formation provided for by
Article 112.

Validity of Existing Kurdistan Contracts

             Prior to the adoption of the Constitution, the Kurdistan government
entered into certain oil exploration or development contracts with foreign companies.
The contracts have not been made public and their scope and the fields to which
they apply are unknown.

              In support of its authority to enter into these contracts Kurdistan
representatives point to Article 141 of the Constitution which preserves the validity
of certain actions of the region of Kurdistan taken since 1992. That article provides:

        Legislation enacted in the region of Kurdistan since 1992 shall remain in
        force, and decisions issued by the government of the region of Kurdistan,
        including court decisions and contracts, shall be considered valid unless they
        are amended or annulled pursuant to the laws of the region of Kurdistan by
        the competent entity in the region, providing that they do not contradict with
        the Constitution.

              Although the savings clause is very broadly drafted, it is subject to the
last limiting clause that any such legislation, court decisions, or contracts do not
conflict with the Constitution. Any existing contract could conflict with Article 112
of the Constitution to the extent that it derogates from the authority given to the
federal and regional governments with respect to the management of production
from existing oil fields or to the extent that it conflicts with the strategic policies
that are to be adopted pursuant to Article 112. If such contracts represent an
exercise of authority within the areas committed by Article 110 exclusively to the
federal government (e.g., foreign sovereign economic and trade policy), the contracts
may also be invalid or subject to modification with respect to activity taking place
after the Constitution became effective. Any more definitive analysis would require
review of the contracts and might also have to await decisions regarding
management and policy pursuant to Article 112.



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